Understanding how your child’s income impacts your own tax return can help you avoid surprises and ensure you file accurately. While children can earn income independently, certain tax rules may require parents to include some of that income or make elections that affect their own return.
This article explains the key ways a child’s income may influence a parent’s individual income tax filing.
1. When a Child Must File Their Own Tax Return
In many cases, a child’s income does not directly appear on the parent’s tax return because the child is required to file their own return.
A child typically must file a tax return if their income exceeds certain thresholds, which vary based on:
- Earned income (wages, salaries, tips)
- Unearned income (interest, dividends, investments)
- Filing status and dependency status
Even if a child files their own return, parents may still be affected in other ways (explained below).
2. The “Kiddie Tax” Rules
The kiddie tax is one of the most important ways a child’s income can impact a parent’s tax situation.
What is the Kiddie Tax?
The kiddie tax applies to certain unearned income of children (typically under age 18, or under age 24 if a full-time student). It is designed to prevent families from shifting investment income to children in lower tax brackets.
How It Affects Parents
- A portion of the child’s unearned income above a threshold may be taxed at the parent’s marginal tax rate, not the child’s rate.
- This does not necessarily increase the parent’s income directly, but it can increase the overall family tax liability.
Example
If your child has significant investment income:
- Part of that income may be taxed at your higher tax rate
- The child may need to file Form 8615 (U.S.) or equivalent documentation
See our article on Form 8615 for more information.
3. Election to Include Child’s Income on Parent’s Return
In some cases, parents can elect to include their child’s income on their own tax return instead of filing a separate return for the child.
When This Applies
This option generally applies when:
- The child’s income is only from interest and dividends
- The total income is below a certain threshold
- The child meets age and dependency requirements
How It Affects Parents
If this election is made:
- The child’s income is added directly to the parent’s income
- The parent may pay additional tax, often at higher rates
- A separate form (such as Form 8814 in the U.S.) must be filed
Pros and Cons
Pros:
- Simplifies filing (no separate return for the child)
Cons:
- May increase the tax owed
- Can affect credits or deductions tied to income levels
For more information regarding Form 8814, please see our article on the subject.
4. Impact on Credits and Deductions
A child’s income can influence a parent’s eligibility for certain tax benefits.
Dependency Status
To claim a child as a dependent, they must meet specific criteria including:
- Relationship to the taxpayer
- Residency
- Support (child cannot provide more than half of their own support)
If a child earns significant income:
- It may affect whether they still qualify as a dependent
Tax Credits
If the child remains a dependent, parents may be eligible for:
- Child Tax Credit
- Credit for Other Dependents
- Education credits (in some cases)
However, higher income (either parent’s or combined through elections) can:
- Reduce or phase out these credits
5. Impact on Household Income Calculations
A child’s income may also affect calculations used for:
- Health insurance subsidies (Marketplace plans)
- Financial aid (FAFSA and similar programs)
- State or local tax credits
Even if not directly reported on your tax return, the child’s income can still be considered in broader household income measures.
6. Earned vs. Unearned Income: Why It Matters
The type of income your child earns is important:
| Income Type | Examples | Impact on Parent |
|---|---|---|
| Earned Income | Wages, salaries, tips | Usually less impact |
| Unearned Income | Interest, dividends, capital gains | May trigger kiddie tax |
Earned income is generally taxed at the child’s rate, while unearned income is more likely to be taxed at the parent’s rate under kiddie tax rules.
7. Practical Tips for Parents
-
Track your child’s income throughout the year
Especially investment income that could trigger kiddie tax rules. -
Evaluate whether to file separately or include income
Run the numbers both ways if eligible for the election. -
Consider long-term tax planning
Investment accounts in a child’s name can have unintended tax consequences. -
Consult tax software or a tax professional
Especially if your child has significant unearned income.